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Trial Court Dismisses Many Claims When Employees Never Signed Non-Compete Agreements With Company That Purchased Their Employer

In the recent case of Cronimet Holdings, Inc. v. Keywell Metals, LLC, No. 14 C 3503, in the federal court for the Northern District of Illinois, the Court dismissed many of the employers’ claims regarding unfair competition by former employees of a company it purchased but who left before the purchase closed to take jobs at a competitor.  The employees had never signed non-compete agreements with the company that purchased their former employer.

The facts of the case are as follows. After spirited bidding with Plaintiff Cronimet Holdings, Inc. (“Cronimet”), Defendant Keywell Metals, LLC (“Keywell Metals”) acquired the assets of Keywell, LLC (“Keywell”) in December 2013. Two of Keywell’s employees, Plaintiffs Edward J. Newman and John D. Joyce, decided not to join Keywell Metals, however, and instead were hired by Cronimet in May 2014, precipitating this lawsuit. Cronimet, Newman, and Joyce filed the suit seeking a declaration that Cronimet could employ Newman and Joyce regardless of a non-disclosure agreement between Cronimet and Keywell (the “Cronimet NDA”) and non-compete agreements Newman and Joyce had with Keywell.

Keywell Metals responded by filing counterclaims against the Cronimet Parties, seeking relief for the following claims: (1) preliminary and permanent injunctive relief against Cronimet for breach of the Cronimet NDA, (2) preliminary and permanent injunctive relief against Newman and Joyce for breach of the non-compete agreements, (3) breach of the Cronimet NDA by Cronimet, (4) breach of the non-compete agreements by Newman and Joyce, (5) breach of fiduciary duty by Newman and Joyce, (6) violation of the Illinois Trade Secrets Act (“ITSA”), (7) misappropriation of confidential information and unfair competition, (8) tortious interference with contract by Cronimet, (9) civil conspiracy, and (10) unjust enrichment. The Cronimet Parties seek to dismiss all but the breach of fiduciary duty and ITSA claims.

Because the trial court found that Keywell Metals did not have standing to enforce the Cronimet NDA or the non-compete agreements, all claims based on those agreements were dismissed. Additionally, Keywell Metals’ claims for misappropriation of confidential information, unfair competition, and unjust enrichment was dismissed because they were preempted by ITSA as they depend on the existence of confidential information for their viability. Keywell Metals’ claim for civil conspiracy was also dismissed to the extent it related to the underlying breach of contract, misappropriation of confidential information, unfair competition, and unjust enrichment allegations but was allowed proceed with respect to Keywell Metal’s remaining claims of breach of fiduciary duties and trade secret violations.

The trial court reasoned as follows with regard dismissing the noncompete agreement claims. Under Pennsylvania law, the assignment was ineffective because the non-compete agreements did not contain an assignability provision and Newman and Joyce did not consent to the assignment. Hess v. Gebhard & Co., 570 Pa. 148, 808 A.2d 912, 922 (2002). Illinois, on the other hand, does not have a per se rule prohibiting assignment. Courts that have considered the issue have generally predicted that Illinois would permit assignment of a non-compete agreement without consent. See AutoMed Techs., Inc. v. Eller, 160 F.Supp.2d 915, 923–24 (N.D.Ill.2001) (“Without any Illinois precedent holding that restrictive covenants may never be assigned without consent, we are unwilling to anticipate new public policy restrictions on contract rights.”). The Cronimet Parties challenged this, arguing that the factual situation here was different, as Newman and Joyce never worked for Keywell Metals and thus cannot be viewed as impliedly consenting to the assignment of their restrictive covenants. The Court did not resolve this issue as it found the agreements  unenforceable.

The Court reasoned that although the Cronimet NDA were not technically a covenant not to compete but rather a restraint on trade, its validity and enforceability should be analyzed in essentially the same way as if it were a covenant not to compete. See H & M Commercial Driver Leasing, Inc. v. Fox Valley Containers, Inc., 805 N.E.2d 1177, 1183–84, 209 Ill.2d 52, 282 Ill.Dec. 160 (2004).  The noted that the Cronimet NDA and the non-compete agreements would only be enforceable if they protected Keywell’s legitimate business interests. Reliable Fire Equip. Co. v. Arredondo, 358 Ill.Dec. 322, 965 N.E.2d 393, 396–97, 2011 IL 111871 (2011); H & M, 282 Ill.Dec. 160, 805 N.E.2d at 1183–84. Whether Keywell has a legitimate business interest had to be determined from the totality of the circumstances, including, for example, “the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions.” Reliable Fire Equip., 358 Ill.Dec. 322, 965 N.E.2d at 403. A company may also have a legitimate interest in maintaining a stable work force, so as to support a no-hire provision like that contained in the Cronimet NDA. See, e.g., Pampered Chef v. Alexanian, 804 F.Supp.2d 765, 782–87 (N.D.Ill.2011) (collecting cases).

The Cronimet Parties argued that any legitimate business interest Keywell had in the Cronimet NDA or the non-compete agreements was extinguished in December 2013 when Keywell ceased doing business so that the agreements were unenforceable when they were assigned to Keywell Metals in August 2014. See Frazier v. Dettman, 569 N.E.2d 1382, 1386, 212 Ill.App.3d 139, 155 Ill.Dec. 771 (1991) (“It makes no sense to protect the partnership’s relationship with its patients when they are no longer serviced by the partnership.”); Herring Gas Co. v. Pine Belt Gas, Inc., 2 So.3d 636, 640 (Miss.2009) ( “Generally, the termination of an employer’s business also terminates the restrictive employment covenant, because the abandonment or termination of the business extinguishes the covenant altogether.”). In Herring Gas, the Mississippi Supreme Court considered a situation similar to that here, where the purchaser of a company’s assets sought to enforce a covenant not to compete that a former employee had entered with the purchaser’s predecessor company. 2 So.3d at 637. The court found that the attempted assignment of the covenant not to compete from the predecessor to the purchaser was not effective because it was made 24 days after the parties’ asset purchase agreement when the predecessor was no longer in business. Id. at 640. At that time, it was impossible for the employee to compete with a company no longer in business. Id.

Keywell Metals responded that Keywell continued to have a legitimate business interest in the agreements until their assignment in August 2014 because the asset purchase agreement provides that Keywell Metals would pay Keywell a percentage of the earnings from one of Keywell Metals’ businesses for a period of four years after the acquisition, giving Keywell a continuing financial interest in ensuring that the Cronimet Parties do not divert business to a competitor. But the Court found that this delayed payment arrangement did nothing to change the fact that Keywell was not to further engage in the business it sold to Keywell Metals. Indeed, as part of the asset purchase agreement, Keywell had agreed not to compete with Keywell Metals for a period of time, demonstrating that it had removed itself entirely from its previous line of business. Thus, the Court concluded that after the asset purchase agreement, Keywell had no further interest in its customers, its confidential information or trade secrets, or retaining a stable workforce; those interests were all transferred to Keywell Metals. Because Keywell did not have a legitimate business interest in enforcing the Cronimet NDA or the non-compete agreements once its assets were sold to Keywell Metals, like in Herring Gas, the Court ruled that its belated assignment of those agreements eight months after the asset purchase agreement was not effective under Illinois law. See Frazier, 155 Ill.Dec. 771, 569 N.E.2d at 1386; Herring Gas, 2 So.3d at 640. Thus, regardless of whether Illinois or Pennsylvania law applied to the assignment issue, the Court granted the motion to dismiss and found that Keywell Metals cannot enforce the Cronimet NDA or the non-compete agreements as Keywell’s assignee.

Our Chicago non-compete agreement lawyers have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

DiTommaso Lubin Austermuehle a firm of Chicago business dispute lawyers handles litigation over non-compete clauses for individuals and businesses of all sizes, including small or closely held businesses for whom competition from an ex-employee can be a serious threat. Our Chicago business lawyers with offices near Wheaton, Glen Ellyn and Carol Stream have substantial experience in restrictive covenant and breach of contract cases, and we are proud of our record of strong results.

DiTommas-Lubin a Chicago business litigation law firm represents both plaintiffs and defendants in such cases, and can also help stop litigation before it starts by reviewing contracts to look for covenants and clauses that could create problems later. Based in Oakbrook Terrace and downtown Chicago, our Evanston and Lake Forest non-compete clause lawyers take cases from Northbrook, Deerfield and Highland Park and many other cities throughout Illinois, as well as in Indiana, Wisconsin and the entire United States. To learn more or set up a free consultation, please contact one of our Chicago business dispute lawyers through the Internet or call toll-free at 1-877-990-4990 today.